Do Buyers Have Unrealistic Expectations Regarding Owner Financing

[Mike Morrison]

I ask this question because in the last year,all of my residential sales involve owner financing. I would say that 80% of prospect buyers expect an interest rate of under 6%.
When they find that we are talking north of 7.5%, they balk.
Are any of you finding this?

[Bryan Hancock]

That isn't surprising if your target is a prime borrower. If you are targeting sub-prime borrowers or people with obstacles to bank financing then they are generally expecting to pay more to rent money.

[Mike Morrison]

Bryan, I'm talking sub prime borrowers and agents. They haven't looked at hard money lately.

[Bryan Hancock]

Dems da breaks.

What does your advertising say? Are you setting the right expectations with your ads so that you can screen properly and avoid misaligned expectations?

[Joel Owens]

Mike I am confused do you do commercial or residential?

Your tag line says commercial.

There is always a bid-ask gap between a buyer and a seller when it comes to price,terms,interest rate,etc. and is to be expected.

Who is being owner financed?There are Doctors,Attorneys,etc. that have impeccable credit and reserves but just can't get conventional financing because of tax write offs to lower income.

These buyers expect to pay very little above market interest rates.They are not interested in inflated rates.You can owner finance a buyer with a real high interest rate but if they default real quick you have gained nothing on the bad credit buyers.

So the sweet spot is in the middle where you get as much as you can on rate and a decent price.

[Mark Brian]

There are exceptions to every rule but most of the people that contact me looking for owner financing do not have a down payment to make it worthwhile for my seller clients to take the risk.

When it comes to owner financing, a former client always liked to say "you can have price or you can have terms, but you can't have both". YMMV

[George P.]

if you are naming the price, you gotta take it easy with the terms. And vice verse. I understand your desire to get the highest selling price and highest interest rate, but there is gotta be a win for the buyer somewhere.
After all, it's the buyer's market.

[Rob Gillespie]

Mike,
I sell a lot on owner financing, one of my favorite lines is I explain that I am taking them from renting @100% interest down to owning @10% interest. I am saving you 90%! This seems to put things into perspective for them.

I deal mostly in lease options now, so I am giving them a 20% credit per month of on time payments off of the purchase price. This is MUCH more than they would get in a fully amortized mortgage. :mrgreen:

[Mike Morrison]

Guy's, You all have Great points!To Joel, I'm a commercial agent by choice but, you do what you have to do. The owner finance deals are mine as an investor.
I find that folks can't come up with a 1% down payment, much less 10%.
I guess ny point is when I shoulder the risk, regardless the price of property,I should be able to charge a risk premium. Only makes sense, lenders call it debt yield.
I really appreciate this forum. I think it's the best on the web.

[Bill Gulley]

I don't have enough info to make specific suggestions, but first you need to have good communications about the financing. I always assessed rates after underwriting the risk, but I understand most can't or won't do it. Working with a third party broker will also help.

Also, compare your rate to the going closing costs of conventional loans. Maybe 2 points, underwriting fees, funding fees, survey, appraisal, filing fees for a 50 page closing, escrow fees, servicing fees and the list goes on. Now, compare the higher rate of your note rate. Closing costs are front end loads, paid up front or financed, your interest is paid over the term the "money" is used. If they re-fi your note in three years, say two years early, they save money.

Sell the benefits of seller financing! You don't have LTV rules initially, so they can get in cheaper and build equity, make improvements and then use the future value of the property to qualify for practically the same dollars!

One other thing, even if you are not under the new rules, you should proceed as if you were, IMO, make it fair, justify your position and why you made the loan. Good luck

[Bill Gulley]

Originally posted by Mike Morrison:
Guy's, You all have Great points!To Joel, I'm a commercial agent by choice but, you do what you have to do. The owner finance deals are mine as an investor.
I find that folks can't come up with a 1% down payment, much less 10%.
I guess ny point is when I shoulder the risk, regardless the price of property,I should be able to charge a risk premium. Only makes sense, lenders call it debt yield.
I really appreciate this forum. I think it's the best on the web.

IMO, you are using the wrong financing vehicle if they have only one per cent down, unless they provide other collateral, that is a bad loan to start with and will not be viewed well in court if you have to go there.

No skin in the game usually dicatates and option being financed along with a lease to provide possession.

I would also say that you never finance inventory, small machinery, furniture and fixtures and disposables (inexpensive stuff) unless the seller wants to just dump it. Financing commercial with a business entity is entirely another game. Good luck...

[Mike Morrison]

Bill thanks for the input.Good point about the LTV.

[Kathy V.]

Hi Mike.

I walked away from a wholesaler's deal because a)the price was too high, b)they wanted a higher than avg int. rate and c)wanted 25% down. I tried to negotiate some of the terms...they wouldn't budge. I walked and left it for another investor who didn't know their numbers.

Yes, are some buyers unrealistic? Sure. Do you want it sold??

[Jason S.]

I would be interested to know how usury laws come into play with these types of loans. I have heard so many conflicting views - any experts out there? I know its state- by state - but maybe some general guidance/info.

[Mike Morrison]

Jason, I can only speak to usury in Texas. 21% is the max. that can be charged. Except for pawn shops which can charge 1% per day.In the early 80% I saw Commerciial Inter. Const. loans at 20% + 3-4 points. The lender, usually a S&L kept a point as an origination fee. We all know what happened.Hope that helps.

[George P.]

1% down would be out of the question if I was selling with owner financing. No skin in the game, they have no tights to the property.

[Shanequa J.]

I think it depends on who you are selling to (investors or owner occupants). I had an offer from an investor: price was market value, 10% down, and 10% interest. Maybe I was expecting too much. For someone living in the house, it might be good.

[Mike Morrison]

Shanequa,

I'm talking about owner/occupant. I would jump on an offer like you received. in this market,we have to look at all offers & options. Thanks for your input.

[Chris Colvard]

Mike,

I took a Texas SAFE act class last night and the usury in Texas is now 18%.

Are you using a licensed mortgage broker to close these deals? The disclosure laws are unreal. The cost to use one is about $450.00 and they do the disclosures. Also, you E & O protection in front of you. I would also use an attorney so that you have that E & O protection.

Some fun points are:

- 7 day waiting period after disclosures are made.
- Closing cost estimates cannot be more than 5% off.
- Another 3 day waiting period if anything changes in the contract.
- No mark up on title or credit report fees.
- Must impound taxes & insurance under certain loan terms.

You can do 5 seller financed deals per running 12 months, but are still required to do all of these disclosures. Fine is $25K per occurrence if you get caught not doing them.

[Mike Morrison]

Thanks for the update Chris!! I use a RE Atty & have a MB that specializes in Owner Finance Deals.I had to shop Title Co's. Many would not do the impoundments on an owner finance deal.

You're correct anything you can do to CYA.I'm like you, anything I can outsource to further limit my liability is well worth the money.